January 2008 "How Does The 2008 Election Affect Estate Planning?"

PLANNING FOR WEALTH & SECURITY
By attorneys Jennifer & Jeff Hawkins

How Does The 2008 Election Affect Estate Planning?

The 2008 presidential election may have far-reaching effects on your estate plan. The successful candidate must resolve lingering issues ranging from capital gains tax to estate tax to Medicaid reform. These issues are interrelated because rising healthcare costs are eating larger bites out of the federal budget, and federal tax policy is in an unstable condition.

Congress set out on a collision course with the tax system in 2002 when it changed how federal death taxes are calculated. Before 2002, each person could pass up to $675,000 to his heirs free of the tax. The 2002 changes modify that calculation this way:

For decedents dying in: The applicable tax exclusion is:
2002 and 2003
$1 million

2004 and 2005
$1.5 million

2006, 2007, and 2008
$2 million

2009
$3.5 million

2010
Unlimited – death tax repealed

2011 and thereafter
$1 million

The federal gift tax applicable exclusion remains at $1 million throughout this time period.

The capital gains tax law loses a major feature in 2010 that many farmers rely on to pass wealth to their children and minimize capital gains for the children if the children must sell the farm. Presently, the children can sell the farm virtually free of capital gains tax in most situations because any gain in the land value before the farmer’s death will be adjusted into the land’s tax basis at the time of the farmer’s death. This basis adjustment eliminates most taxable gain (but the land value is still taxed under the estate tax).

What does all of this mean to you, the taxpayer? Plenty.

First, imagine the turmoil in the federal budget when a major tax disappears in 2010 and reappears with a vengeance in 2011. Next, imagine how the capital gains tax system will become complicated when one of its major parts (basis adjustment at the decedent’s death) disappears in 2010 and reappears in 2011. This chaos looks like a ticking tax time bomb. The new president will have only from the time of his inauguration to January 1, 2010, to diffuse the bomb. Meanwhile, nursing home costs are increasing at about 5% every year (not to mention many other inflation-sensitive budget items).

We estate planners are holding our breath in suspense no matter what the solution may be. We can’t plan for all the possibilities because we can’t see into the future. Even if we could read minds, we don’t know whose mind to read because we don’t know the election result.

The solution to this problem will impact all of us somehow. We can count on Congress to react somehow, but we cannot predict how. All we can know at this time is that the people that we elect to serve us in Washington this year will face one of our country’s biggest tax reform crises that we have seen in decades. Let’s pray that we pick good people for the job.
THIS ARTICLE IS NOT LEGAL ADVICE. ALWAYS CONSULT AN ATTORNEY DIRECTLY BEFORE RELYING UPON THIS ARTICLE OR CHANGING AN ESTATE PLAN.